SNC Lavalin mulls retreat from Saudi Arabia amid deepening diplomatic row
By Christopher ReynoldsGeneral Government Manufacturing engineering manufacturing saudi arabia SNC-Lavalin
The feud, plus problems with a mining project and an arbitration loss in Australia, hitting 2018 financial results.
MONTREAL — The head of SNC-Lavalin Group Inc. said ongoing diplomatic tensions between Canada and Saudi Arabia are hurting business and forcing the company to consider a possible retreat from the oil-rich state as SNC share prices plunged to their lowest point in more than six years.
According to Neil Bruce, Ottawa’s recent granting of asylum to a Saudi teenager is the latest likely blow to the bottom line, spurring him to order a review of where the builder conducts operations, with an eye to “predictability.”
Bruce’s announcement Jan. 28 that the feud, as well problems with a mining project and an arbitration loss in Australia, would sink its financial results for 2018 sent shares plummeting 27% to close at $35.01 on the Toronto Stock Exchange, their lowest since September 2012.
“We’re deeply disappointed about the position we are in,” Bruce said morning.
“I don’t really want to comment on the ins and outs and the rights and wrongs of the relationship between the two countries. But the relationship…has not been helped by the recent position with regards to the asylum seeker,” he told analysts on a conference call.
“That, from a Saudi perspective, has not gone down very well at all.”
Bruce said the tensions would likely hinder SNC’s ability to secure new contracts in the Middle Eastern country, lowering revenue in the fourth quarter and in 2019.
The company’s oil and gas segment took in the lion’s share of SNC’s revenues in 2017, raking in 37 per cent of its $9.1 billion. In the first nine months of 2018, operations in the Middle East and Africa generated nearly one-quarter of total revenues.
Now, the engineering and construction giant plans to take a non-cash, after-tax goodwill impairment charge of approximately $1.24 billion or $7.06 per diluted share related to its oil and gas business.
Asked whether SNC will consider selling its energy unit in Saudi Arabia, where about 9,000 of the Montreal-based company’s 50,000 employees now work, Bruce said that “we will be having a look at that.”
“We will also be having a look at clients and countries that we’re operating in to make sure that we have far more predictable outcomes,” he said.
Overseeing that review will be new chief operating officer Ian Edwards, appointed Jan. 28. Edwards, who will report to Bruce, has led SNC’s infrastructure business since 2014.
Analyst Benoit Poirier of Desjardins Capital Markets said in an investor note he was “disappointed” with Monday’s announcement, “in addition to being surprised by the change in tone in connection with business relations with Saudi Arabia.”
Chris Murray, an analyst with AltaCorp Capital, cited “significant uncertainty” around the 108-year-old company’s future in the Arabian peninsula due to fracturing political relations.
“But SNC has a very long history of doing work in the region. There are other companies that could come in to do it, but not easily,” he said in an interview.
The revised forecast, which triggered an erasure of about $2.37 billion in market value, marked a 180-degree turn from last November, when Bruce assured investors that all was well in Riyadh.
“Despite the political issues we’ve had to contend with, our business is solid,” he told analysts on a conference call Nov. 1.
“We continue to monitor the situation closely and we’re engaged with our clients,” Bruce said then, but insisted workers and revenues in the country – $992 million in 2017 – remained unaffected by the rift.
Last August, a tweet regarding human rights from Foreign Affairs Minister Chrystia Freeland set off a trade embargo by the monarchy.
The relationship deteriorated further after news of Saudi journalist Jamal Khashoggi’s killing in the Saudi consulate in Istanbul broke in October. Earlier this month, Canada granted asylum to Rahaf Mohammed, a Saudi teenager who fled from her family.
Asked by an analyst Monday if SNC had been getting its “fair share of work” in the kingdom, Bruce replied: “I think we were, up until around about October or November.”
Last week Bruce announced that Craig Muir, chief commercial officer at British oil services company Petrofac, will succeed Christian Brown as head of SNC’s oil and gas unit starting in April.
The lowered full-year profit target for 2018 stems largely from a “serious problem on a mining project” awarded in 2016, Bruce said, citing issues including ground conditions, subcontractors, “competencies” and cost overruns.
The company expects adjusted diluted earnings per share from its engineering and construction operations for 2018 to be in the range of $1.15 to $1.30.
Adjusted consolidated diluted earnings per share are expected to be in the range of $2.15 to $2.30.
In November, the company had forecast adjusted diluted earnings per share from engineering and construction to be in a range of $2.60 to $2.85.
Adjusted consolidated diluted earnings per share were expected in a range of $3.60 to $3.85.